
on Corporate Finance 
By:  Rowat, Colin. 
Abstract:  We explore commons problems when agents have access to capital markets. The commons has a high intrinsic rate of return but its fruits cannot be secured by individual agents. Resources transferred to the capital market earn lower returns, but are secure. In a two period model, we assess the consequences of market access for the commons' survival and welfare; we compare strategic and competitive equilibria. Market access generally speeds extinction, with negative welfare consequences. Against this, it allows intertemporal smoothing, a positive effect. In societies in which the former effect dominates, market liberalisation may be harmful. We reproduce the multiple equilibria found in other models of competitive agents; when agents are strategic, extinction dates are unique. Strategic agents generally earn their surplus by delaying the commons' extinction; in unusual cases, strategic agents behave as competitive ones even when their numbers are small. 
Keywords:  commons, capital markets, Washington Consensus, property rights 
JEL:  C73 D91 O17 Q21 
Date:  2004–12 
URL:  http://d.repec.org/n?u=RePEc:bir:birmec:0501&r=cfn 
By:  Thilo Pausch (University of Augsburg, Department of Economics) 
Abstract:  The standard situation of ex post information asymmetry between borrowers and lenders is extended by risk aversion and heterogenous levels of reservation utility of lenders. In a situation of direct contracting optimal incentive compatible contracts are valuable for both, borrowers and lenders. However, there may appear credit rationing as a consequence of borrowers optimal decision making. Introducing a bank into the market increases total wealth due to the appearance of a portfolio effect in the sense of first order stochastic dominance. It can be shown that this effect may even reduce the problem of credit rationing provided it is sufficiently strong. 
Keywords:  risk aversion, costly state verification, credit rationing, bank 
JEL:  D82 G21 L22 
Date:  2005–02 
URL:  http://d.repec.org/n?u=RePEc:aug:augsbe:0271&r=cfn 
By:  Daniele CoenPirani 
Abstract:  Macroeconomic models with heterogeneous agents and incomplete markets (e.g. Krusell and Smith, 1998) usually assume that consumers, rather than firms, own and accumulate physical capital. This assumption, while convenient, is without loss of generality only if the asset market is complete. When financial markets are incomplete, shareholders will in general disagree on the optimal level of investment to be undertaken by the firm. This paper derives conditions under which shareholders unanimity obtains in equilibrium despite the incompleteness of the asset market. In the general equilibrium economy analyzed here consumers face idiosyncratic labor income risk and trade firms' shares in the stock market. A firm's shareholders decide how much of its earnings to invest in physical capital and how much to distribute as dividends. The return on a firm's capital investment is affected by an aggregate productivity shock. The paper contains two main results. First, if the production function exhibits constant returns to scale and shortsales constraints are not binding, then in a competitive equilibrium a firm's shareholders will unanimously agree on the optimal level of investment. Thus, the allocation of resources in this economy is the same as in an economy where consumers accumulate physical capital directly. Second, when shortsales constraints are binding, instead, the unanimity result breaks down. In this case, constrained shareholders prefer a higher level of investment than unconstrained ones. 
URL:  http://d.repec.org/n?u=RePEc:cmu:gsiawp:1109532697&r=cfn 
By:  Campi,Luciano; Sbuelz,Alessandro (Tilburg University, Center for Economic Research) 
Abstract:  Equity Default Swaps are new equity derivatives designed as a product for credit investors. Equipped with a novel pricing result, we provide closedform values that give an analytic contribution to the viability of crossasset trading related to credit risk. 
JEL:  G12 G33 
Date:  2005 
URL:  http://d.repec.org/n?u=RePEc:dgr:kubcen:200528&r=cfn 
By:  Campi,Luciano; Polbennikov,Simon; Sbuelz,Alessandro (Tilburg University, Center for Economic Research) 
Abstract:  Unlike in structural and reducedform models, we use equity as a liquid and observable primitive to analytically value corporate bonds and credit default swaps. Restrictive assumptions on the .rm.s capital structure are avoided. Default is parsimoniously represented by equity value hitting the zero barrier either di¤usively or with a jump, which implies nonzero credit spreads for short maturities. Easy crossasset hedging is enabled. By means of a tersely speci.ed pricing kernel, we also make analytic creditrisk management possible under systematic jumptodefault risk. 
JEL:  G12 G33 
Date:  2005 
URL:  http://d.repec.org/n?u=RePEc:dgr:kubcen:200527&r=cfn 
By:  Eckhard Platen (School of Finance and Economics, University of Technology, Sydney) 
Abstract:  The paper discusses various roles that the growth optimal portfolio (GOP) plays in finance. For the case of a continuous market we showhow the GOP can be interpreted as a fundamental building block in financial market modeling, portfolio optimization, contingent claim pricing and risk measurement. On the basis of a portfolio selection theorem, optimal portfolios are derived. These allocate funds into the GOP and the savings account. A risk aversion coe±cient is introduced, controlling the amount invested in the savings account, which allows to characterize portfolio strategies that maximize expected utilities. Natural conditions are formulated under which the GOP appears as the market portfolio. A derivation of the intertemporal capital asset pricing model is given without relying on Markovianity, equilibrium arguments or utility functions. Fair contingent claim pricing, with the GOP as numeraire portfolio, is shown to generalize risk neutral and actuarial pricing. Finally, the GOP is described in various ways as the best performing portfolio. 
Keywords:  growth optimal portfolio; portfolio optimization; market portfolio; fair pricing; risk aversion coefficient 
JEL:  G10 G13 
Date:  2005–01–01 
URL:  http://d.repec.org/n?u=RePEc:uts:rpaper:144&r=cfn 
By:  Fernandez, Pablo (IESE Business School) 
Abstract:  I correct some expressions in Fernández (2004) and provide a more general expression for the value of tax shields. This expression is the difference between the present values of two different cash flows, each with its own risk: the present value of taxes for the unlevered company and the present value of taxes for the levered company. The value of tax shields in a world with no leverage cost is the tax rate times the current debt, plus the tax rate times the present value of the net increases of debt. The value of tax shields depends only on the nature of the stochastic process of the net increase of debt; it does not depend on the nature of the stochastic process of the free cash flow. 
Keywords:  Value of tax shields; present value of the net increases of debt; required return to equity; 
JEL:  G12 G31 G32 
Date:  2005–02–14 
URL:  http://d.repec.org/n?u=RePEc:ebg:iesewp:d0581&r=cfn 
By:  Fernandez, Pablo (IESE Business School) 
Abstract:  The Comment is thought provoking and helps a lot in rethinking the value of tax shields. However, the conclusion of Fieten, Kruschwitz, Laitenberger, Löffler, Tham, VélezPareja and Wonder (2005) is not correct because, as will be proven below, the main result of Fernández (2004) is correct for several situations. Equation (16a) shows that the value of tax shields depends only upon the nature of the stochastic process of the net increase of debt. 
Keywords:  Value of tax shields; present value of the net increases of debt; 
JEL:  G12 G31 G32 
Date:  2005–01–15 
URL:  http://d.repec.org/n?u=RePEc:ebg:iesewp:d0579&r=cfn 
By:  Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Andrew Ziogas (School of Finance and Economics, University of Technology, Sydney) 
Abstract:  This paper presents a numerical method for pricing American call options where the underlying asset price follows a jumpdiffusion process. The method is based on the FourierHermite series expansions of Chiarella, ElHassan & Kucera (1999), which we extend to allow for Poisson jumps, in the case where the jump sizes are lognormally distributed. The series approximation is applied to both European and American call options, and algorithms are presented for calculating the option price in each case. Since the series expansions only require discretisation in time to be implemented, the resulting price approximations require no asset price interpolation, and for certain maturities are demonstrated to produce both accurate and efficient solutions when compared with alternative methods, such as numerical integration, the method of lines and finite difference schemes. 
Keywords:  American options; jumpdiusion; FourierHermite series expansions; free boundary problem 
JEL:  C61 D11 
Date:  2005–01–01 
URL:  http://d.repec.org/n?u=RePEc:uts:rpaper:145&r=cfn 